A significant gap in quality of auto-enrolment master trust investment exists with those aimed at smaller employers almost exclusively in passive equities, research from the DC Investment Forum has found.
A report from the DCIF Investment Designs: A Comprehensive Study, has found members of master trusts appear significantly more exposed to market volatility than might be the case if there was a higher charge cap or if sponsors were more open to including actively managed and smart beta.
The charge cap could also be pushing master trusts towards cheaper solutions which do not add as much value as their actively managed counterparts, the report argues.
The report argues that at present there is no single way to compare and contrast investment performance, and calls on the regulator to develop one as a matter of urgency.
The report says the issue of reporting transaction costs, and the fear that the auto-enrolment review will require these costs to be included in the charge cap, has created strong views around volatility controlled asset allocation approaches. As these are algorithmic and in theory could trade to alter the asset allocation in the fund daily, they may incur significant transaction costs. For some master trusts, this had been a reason to avoid this approach when designing their propositions. Master trusts who had incorporated this approach were aware of the issue, and commented that, if and when that path was taken by the regulations, they would expect to review whether a volatility- controlled approach was still feasible, the report said.
The DCIF says it is concerned at the idea of including transaction costs within the charge cap because it continues a narrative in the DC industry that cost is the only measure of value. The focus of cost-reduction at present has been on the investment proposition. While the relatively fixed costs of administration are understandable, there should be greater focus on the other elements of member borne deductions, rather than investment. The state of reporting the survey has uncovered also suggests it would not be feasible at this time to include transaction costs in the charge cap – the industry simply doesn’t know the size of this at present on a consistent basis. Further, inclusion of transaction costs would be a de facto reduction in the charge cap. This will reduce the perceived ability of active managers to add value for members of master trusts further, the report says.
Speaking at a DCIF event last night, report author Nico Aspinall said: “Better ways to measure the performance in the market are needed. It is currently very hard to get to the bottom of investment performance. Master trusts could report on how a typical 25, 35, 45 and 55-year-old invested in the default fund has fared. Common language around performance would be immensely helpful.”
Capital Group DC specialist David Calfo said: “There is some frustration from the asset management side in engaging with master trusts and advisers on how to get better returns through master trusts. The rhetoric sounds good but there has not been a lot of action.”